Willmar-based Torgerson Properties wants to re-launch its hotel development business with a 111-room Homewood Suites by Hilton across the street from St. Mary’s Hospital in Rochester, part of the sprawling Mayo Clinic.

Torgerson sees health in Rochester lodging market

Torgerson Properties launched its Homewood Suites by Hilton in St. Louis Park in 2009, and the project was named best new hotel by the chain in 2011. Torgerson plans to resume development next spring with a Homewood Suites in Rochester, Minn. (File photo: Bill Klotz)

If hotel developers are looking for a market to get better, why not in Rochester, Minn., the city of healing?

Willmar-based Torgerson Properties wants to re-launch its hotel development business with a 111-room Homewood Suites by Hilton across the street from St. Mary’s Hospital in Rochester, part of the sprawling Mayo Clinic.

The upscale, extended-stay hotel would be built next to a Courtyard by Marriott at 161 13th Ave. SW that Torgerson developed in 2005. The company also operates a SpringHill Suites, which it built in 1998, one block north.

Torgerson President Mitch Peterson said the company plans to begin construction in spring 2013, with an opening scheduled a year later. Torgerson hasn’t secured financing yet for the Homewood project, but it has purchased the site and Hilton has agreed to the plan, he said.

Torgerson, whose last development was launched in 2008, developed and operates 28 hotels in Minnesota and Florida. It’s re-entering a lodging market where the recovery in occupancy and rates still won’t support new construction in most locations, said Ted Leines, a broker and hotel consultant based in the Twin Cities.

“It has to be an ideal spot that has unique demand generators to win lenders and investors, and those are still very rare,” Leines said.

The Torgerson’s Rochester site is close to ideal, Leines said. “That’s an extraordinary location because of the Mayo demand, and there’s no other product like this for Hilton in Rochester,” he said.

St. Mary’s is where most of the Mayo system’s surgeries are done, and those complex procedures frequently generate long stays. “We think it makes sense to match that with an extended-stay product,” Peterson said.

Homewood Suites by Hilton was the only upscale, extended-stay brand that wasn’t already represented in Rochester and that means any travelers in the Hilton rewards programs will be channeled to the new Torgerson hotel, Leines said.

Rochester’s strength showed up in a big gain in RevPAR in 2011, climbing 11.2 percent from the year before, and outperforming the Minneapolis-St. Paul markets and statewide markets. But this year’s results indicate the city isn’t immune to the weak overall market.

RevPAR, a measure of a hotel’s financial performance in occupancy and rates, fell 1.7 percent and occupancy 2.4 percent in the first half of this year, according to data from STR, the Hendersonville, Tenn.-based hotel researcher.

Leines said most of that decline occurred because corporate travel buyers reducing their spending.

Despite the remaining weakness, Peterson said it was time to launch the project.

“The Homewood brand is only available until somebody snaps it up,” he said. “That’s the risk we face in waiting — that we won’t win the brand. We hope our boldness pays off.”

Part of the difficulty is in finding affordable development loans. Lenders are back in the hotel market, but they’re requiring between 30 percent and 35 percent of a hotel’s development cost in cash from the borrower, up from as low as 15 percent in the past, Leines said.

Torgerson should have an advantage there, said Steve Sherf, owner of the Twin Cities-based Hotel Consulting Group.

“Because of their record as a developer and the strength of the site, they should have access to equity and debt that’s below market,” Sherf said. “On top of that, they own these properties and draw management fees from them, too.”

Torgerson is working with Rochester businessman Marc Carpenter on the Homewood, who also was an investor in Torgerson’s two other Rochester properties.

One more advantage in Rochester: The market has added just 150 rooms since January 2006, according to STR. The current total in the Rochester market is 5,274 rooms.

The Torgerson team hasn’t started the government approval process in Rochester, but Peterson said that with two hotels already operating within a block of the new site that he didn’t anticipate problems.

Calls to the city of Rochester for comment weren’t returned.

The Rochester project is the closest to a launch, but Torgerson hopes to get several other projects in the ground in 2013 and 2014, Peterson said.

Torgerson owns property at 10600 Wayzata Blvd. in Minnetonka, where it has proposed a 100-room Hampton Inn and Suites. Soil remediation has been completed and the goal is to start construction next spring, Peterson said. Torgerson owns and operates 14 properties in the Twin Cities.

The company is also working on another west Twin Cities site, and it plans a major renovation and repositioning for its four hotels in Willmar, which should begin next year.

How Rochester market stacks up

Rochester, Minn., posted big revenue gains in the first half of 2011, beating performance in statewide and Twin Cities markets. But revenue declined slightly early this year.